Weekend Analysis: Three Potential Bitcoin Price Paths

The Bitcoin price is likely to continue sideways consolidation since last Monday’s low near $460 (Bitstamp). Weekend trade has failed to exceed the past week’s highs and lows in the cramped range between $460 and $490. There are three potential paths for Bitcoin Price.

Bitcoin Price Background

What Determines the Bitcoin Price?

Bitcoin Exchange buying has the effect of pushing the Bitcoin price up. The bitcoins are changing hands – from the exchange to the buyer – and, hence, there is an associated Bitcoin transaction. Yet, it is the exchange transaction that generates the increase in the Bitcoin exchange rate. The same but opposite is true for exchange selling: bitcoins change hands resulting in a blockchain transaction (which doesn’t affect price), and the Bitcoin exchange transaction causes price to go down. In addition to all other network transactions, exchange buying and selling is, therefore, reflected in the blockchain. Notice how the range of the number of Bitcoin transactions has been contracting since mid-March 2014.

Bitcoin Whales

Some confusion abounds about who moves the Bitcoin price, with some people under the mistaken impression that news events or merchant “selling-pressure” causes updrafts and downdrafts in the price chart. Bitcoin is a global market instrument and, as with all markets, there are large institutional hands at work.

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Bitcoin Probabilities, Opportunities and Experience

Evidence of an ongoing advance has been presented during the past few weeks’ analysis reports. Bear in mind that a single piece of evidence does not make an advance. The analyst gathers evidence with the objective of weighing the stacks in favor of advance, decline or consolidation.

Calling a top or bottom is out of the question because, historically, such calls are almost always proven wrong in the market. In this analyst’s view, the best we can do is to look for the signs of trend change; to determine the price action that will confirm the change, and to then trade according to the opportunities with the highest probability.

Risk assessment, money management and trading strategy are critical components of the trader’s skillset. Besides having an analytical toolkit to inform decision-making and potential outcomes of price action (risk and reward), every trader should have clearly defined risk assessment, money management and entry/exit strategy plans. These should be documented and – above all – mechanistically followed. However, strangely, their contents and sophistication are acquired and developed only by the lessons we learn in the market – i.e. by mistakes and losses.

Three Paths of Bitcoin Price

Expectation is that the Bitcoin price will eventually seek to re-establish trade at the $600 price level. However, there are several paths by which it could make that journey:

gradual advance with battles at each reaction level on the way up

drawn-out consolidation followed by a break-out that forms a clearly defined 3 or 5 wave structure to $590 during the coming weeks

drop to a lower decline low followed by a powerful bounce to the upper decline channel trendline

Hypothetical Bitcoin Trade

If this analysis were a trade signalling service, the recommendation would be to wait for the 20-period moving average (20MA) to cross over the 200-period moving average (200MA) and to then open a position with a stop-loss $10 below the cross-over level and take-profit at $550. The presence of the channel upper trendline near $550 is bound to be a reaction level causing deeper correction, and would present a new entry opportunity for a trade targeting $590.

However, suggesting trade entries and exits is not the objective of this analysis series. Analysis is presented, by this analyst, as a means of sharing his years of market experience and pattern recognition studies. It is intended as a means of supplementing or complementingtraders’ own analyses. The fact that this analyst has correctly called targets for several weeks running has been the result of predictable trade in the Bitcoin price chart, and not due to any extraordinary ability of the analyst to always be right. Nevertheless, some experience goes a long way toward those outcomes that are less likely to happen. Let’s continue with the example trade.

Critical Analysis

Looking at the Bitcoin chart and its recent price action, the hypothetical trade setup described above seems a sensible trade setup. It avoids impulsive entry at current levels and therefore avoids the over-exuberant expectation of an immediate advance. The entry uses the 20MA and 200MA cross-over as a trigger, which is rational (given the significance of this technical market event), and also smart since we are allowing the market to confirm our expectation by “coming to us”. After letting the cross-over be the trigger to our entry, we change the 20MA’s function to that of support. If trade above the 200MA were indeed advance (and not simply a test of the level) then, trade should stay above the 200MA and continue advancing while using the 20MA as support. See the inverse of this scenario in the price action following the 20MA/200MA cross-over on the left of the first Bitstamp chart above.

Great trade setup… or is it?

Price action may pan out favorably and hit target at $550, but there is a caveat: the 200MA is still descending as it slowly pulls out of its dive over the next 50 to 100 4-hour candles. This implies that the 20MA is unlikely to gain much altitude before being drawn back down to the 200MA’s magnetic pull. Immediate advance to $550 is, therefore, a lower probability outcome than the outcome whereby the 20MA and 200MA cross paths a few more times until such time as the 200MA’s path has leveled out.

Hence, the first path, namely “gradual advance” is a low probability outcome.

Similarly, in light of the evidence stacking up against a continued decline, the third path (decline and bounce) is the lowest probability outcome. Not impossible, but less likely than the second path which is sideways consolidation.

Bitcoin Price Highest Probability

At this stage, it appears consolidation is pivoting around $475 in the Bitstamp and Bitfinex charts, and slightly lower, around $467, in the BTC-e chart. Assuming consolidation continues in the recent pattern of price action; the 200MA in the 4-hour Bitcoin chart should level out after a week or two.

However, given the potential of a tumultuous week in the global markets (see Economic Data below), it is possible that the consolidation range is redefined (or fast tracked) by an expected global market volatility injection in the coming week. Daily analysis updates will keep readers informed.

Economic Data This Week

China’s Industrial Production (year-on-year) has printed at a disappointing 6.9% increase, as opposed to the expected 8.8% and in contrast with last year’s figure of 9%. A few percentage points may seem insignificant, but consider that China’s shrinking manufacturing output reflects a decrease in global demand – or more properly stated – a global decrease in consumption. The implication for the global economy is grim, and markets will reflect their disappointment at the market open on Monday 15 September.

The disappointing news from China, ironically, is good for Bitcoin but will most likely not be seen in the Bitcoin price chart with immediate effect. Not that the Chinese manufacturing data is decisive, yet increased global economic uncertainty will drive investors to safe havens as they seek to protect their wealth, and the increased transaction volume will serve to promote Bitcoin as a fast, secure payment method and a lucrative market instrument.

As if the Chinese Industrial Production data is not bad enough, there are plenty of market shaking data releases and economic event in this week’s calendar. Fed Chairperson Yellen speaks, the FOMC will make a statement, many central banks and monetary policy statements are scheduled as well as releases of indicators of above-average significance.

The writer is fully invested in Bitcoin via BTC-e and Bitfinex. Trade and Investment is risky but not as risky as some other things out there. Take care only to take action in the market when you are 100% sure of the outcome. CCN accepts no liability whatsoever for losses incurred as a result of anything written in this Bitcoin price analysis report.

Posted by Venzen Khaosan

Market analyst and Open source developer with a keen interest in blockchain technology, consensus mechanisms and the decentralizing effect.
He has found a solution to the PKI mechanism. Email me to discuss.